If you’ve worked hard to maintain good credit, President Joe Biden is about to make your future mortgage more expensive.
A Federal Housing Finance Agency rule set to take effect on May 1 will increase monthly mortgage fees for borrowers with good credit scores. Those higher fees will be used to subsidize individuals with bad credit scores.
The administration claims the change will help support low-income home buyers. But others say it’s part of the White House’s ongoing effort to remedy racial differences in home ownership.
Whatever the rationale, the result is clear: Borrowers with strong credit will likely wind up paying thousands of dollars more over the course of their mortgages, thanks to the Biden administration’s policy.
Here’s how the rule change will work:
When an individual takes out a mortgage, the interest rate they pay generally reflects two things: the federal funds rate set by the Federal Reserve and something called a loan-level price adjustment. The latter functions like a car insurance premium that goes up after you’ve had an accident.
In short, riskier borrowers with low credit scores or income pay more each month for their mortgage. These borrowers will still pay more after May 1 but much less than they paid before. In order to compensate for that lost revenue, borrowers with strong credit will see their monthly increase to roughly $40 a month on a $400,000 mortgage. That’s an extra $14,400 over the course of a standard 30-year mortgage.
The Federal Housing Finance Agency regulates federal mortgage guarantor giants Fannie Mae and Freddie Mac—which are both quasi-government agencies—meaning those fee hikes will be reflected for most consumers who seek to take out a mortgage with a bank. A majority of mortgages are eventually secured by Fannie Mae and Freddie Mac, resulting in the two companies holding tremendous influence over conventional mortgage rates.
According to former Federal Housing Finance Agency director Mark Calabria, shaping the policy to benefit anyone with lousy credit lets the Biden administration avoid offering sweetheart deals to minorities, which would violate federal law.
“The Biden administration is definitely trying to create more of a cross subsidy between good credit and bad credit, that’s the intent,” Calabria said. “They are essentially trying to discriminate by race within the legal rules they have and minorities tend to have lower credit scores.”
A review of the Federal Housing Finance Agency’s recent rule proposals make it clear that increasing minority—in particular black—home equity is at the heart of a variety of agency initiatives.
On April 19, the Federal Housing Finance Agency proposed a series of rules targeted at “Fair Lending, Fair Housing, and Equitable Housing Finance Plans.” Most of the proposals would “codify existing FHFA practices” but also add requirements for lenders related to increasing minority homeownership. Some objectives of the rules include “reducing the homeownership gap for an underserved community” and “reducing disparities in negative outcomes for an underserved community in servicing, loan modifications, and loss mitigation.”
In those proposals, the Federal Housing Finance Agency states that part of the reason it wishes to boost minority homeownership is to generate wealth for those communities.
Because lenders heavily rely “on certain credit attributes in the current mortgage underwriting process,” black home loan applications are denied at a higher rate than every other ethnic group in the country, including Hispanics and native Indians. Neighborhoods with higher concentrations of blacks also see lower home prices, the Federal Housing Finance Agency notes.
“Their view is you didn’t build that credit. It’s part of their general belief that credit scores are due to societal facts out of their control,” Calabria said. “It’s legitimate for people to be kind of offended and angry at some of this.”
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